Small business owners are usually time poor – focusing most of their time and energy on starting, running, and growing their business.
Very often they do not have a properly thought-out financial plan for themselves and their dependents.
A financial plan is an analysis of a family’s current and future financial affairs. The plan analyses details of assets, income and spending, projections about future income, provision for future expenses, long-term saving and investing, insurance, taxes and more. A full financial plan will also incorporate retirement and estate planning.
Why is a Financial Plan so Important?
We all have financial goals and objectives, but sometimes fail to document what they are. Without a proper financial plan, it’s difficult to know whether you and your family are on track to secure your financial future.
For young families this may include things like planning for third level education costs, ensuring the correct amount of life or income insurance is in place, and understanding how to increase the chances of a comfortable retirement.
As we go through life, the financial plan is crucial for more detailed modelling of retirement expectations, managing financial risk, how to exit a business and draw down income post retirement, thinking about estate planning and more.
Key Financial Planning Topics for Business Owners
Whether starting a new business or running a mature SME, consideration needs to be given to topics such as health/income/illness/life insurance and pension planning – these are often provided as standard benefits for employees of large corporations, but not small business.
For example, small business owners should be aware that the lower rate of PRSI they pay means that they do not qualify for social welfare illness benefit. A policy of Income Protection insurance can provide peace of mind if unable to work due to illness or injury, and premiums can qualify for tax relief.
Pension planning is too often put on the ‘long finger’ because it’s considered to be so far away, unaffordable, uncertain, or un-necessary because of the state pension – all wrong.
Pension saving is probably the most important component of a financial plan for business owners. It allows for small payments at the outset which can grow with income, tax relief upfront, tax-free growth, and significant tax-free lump sums at retirement. Combined with retirement relief or entrepreneurs’ relief, the pension is an important means of transferring wealth from corporate to personal ownership.
Pension contributions qualify for generous tax relief on up to 40% of salary for a sole trader. For a company owner, contributions can be significantly higher with potential for large lump-sum transfers from company earnings to personal pensions to fund years when payments were not made. Careful planning and professional advice is crucial to maximise benefits.
What Role Does a Financial Adviser Play?
An adviser will analyse and illustrate your financial situation, providing you with solutions tailored to your individual circumstances. This will include researching all options, explaining how complex financial products work, documenting the plan and meeting for a review at least annually.
Using a professional adviser takes emotion out of analysing financial decisions. It gives you access to someone who knows about investments, financial protection, and constantly changing rules on taxation and pensions. It provides you with someone to educate you and your family on how to achieve your financial goals and objectives.
Your Goals & Objectives
Financial goals and objectives change as we go through life. These should be incorporated into your financial plan as additional insurance, savings or investment needs or tax planning arise. Examples of when changes might need to be made to your plan include:
- Getting married or Having children
- Change of employment
- Starting a new business venture
- Buying a home (or downsizing later in life)
- Acquiring a windfall or inheritance
- Retiring from employment
- Becoming ill
“I already have a pension”
Financial planning is not just about pensions, but the quote above is something we hear regularly. Equally as often we find out that pension provision is inadequate. Whether you work as a private sector employee or are a self-employed business owner, you should know the following:
- What assets your pension savings are invested in.
- Whether you and/or your employer are contributing enough.
- Whether you are making full use of tax relief available.
- What is a reasonable projection of your retirement income?
- Whether the investment risk of your pension fund is appropriate for you.
- The total costs you are paying. (Hint: it’s not just an ‘AMC’)
If you cannot answer any of the above, or are just unsure, you would be well advised to review your affairs.
Financial Planner – Ardbrack Financial Limited.
5 Guardwell, Kinsale, Co.Cork
Disclaimer: The content of this article is for general information purposes only. It does not constitute tax or investment advice as it does not take into account the investment objectives, knowledge and experience or financial situation of any particular person or persons. You are advised to obtain professional tax and investment advice suitable to your own individual circumstances. Ardbrack Financial Limited makes no representations as to the accuracy; validity or completeness of the information contained herein and will not be held liable for any errors or omissions.